Taxes: Taking The Clean Fuel Deduction

If you're bought a hybrid vehicle this year you may be eligible for a tax break. Read this article to find out if you qualify.

The rising cost of gas prices couples with the deepening concern over environmental degradation has led the major car manufactures to introduce in recent years alternative cars which rely less on oil. Hybrid cars are one of these models - running on a combination of electric power and gasoline, they reduce pollution by cutting back on harmful emissions. Unfortunately, they are more expensive than normal cars, which prevents a lot of environmentally-conscious people from driving them. The IRS recognizes this, and has established a one-time tax deduction which helps defray the cost of purchasing hybrid vehicles.

The deduction, known as the Clean Fuel Tax Deduction, allows for the tax year 2004 a deduction of $2,000 to be taken for a qualifying hybrid vehicle that burns clean fuel. (This only includes hybrid vehicles - not electric cars). The government defines a clean-fuel burning car as one that utilizes either natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, electricity, or any other fuel that is at least 85% alcohol or ether. Only certain cars qualify, as well. As of 2004, the only vehicles the IRS has labeled as qualifying are the Toyota Prius (2001-2004 model years), the Ford Escape, the Honda Insight (2001-2004 model years), and the Honda Civic Hybrid (2003-2004 model years). However, if you spent money on the installation of any equipment that turned your vehicle into a clean-fuel burning vehicle (such as upgrading an engine or fuel system) you may be able to deduct these costs as well, up to the maximum amount allowable.

Incidentally, if you own a clean-fuel delivering station, you can take a deduction on the cost of that property up to $100,000 total, for all tax years the deduction is taken. For example, if you claimed $75,000 in costs last year as a clean-fuel vehicle property deduction, you can only take a maximum of $25,000 this year. For clean-fuel vehicle property to qualify for the deduction, the property must be a place where a clean-fuel burning vehicle can either refill their tank with the clean fuel, or recharge their battery in the case of an electric car. This means that if you own property in which hydrogen is stored that is used in a hydrogen powered car, but you don't dispense the hydrogen to the actual cars in that location, the property does not qualify for the deduction.

One catch to the clean fuel deduction is that it can only be taken in the year that the vehicle was purchased. This means that if you bought the car in 2002, you cannot take the deduction this year. However, if this is the case, you can file a Form 1040X, which is an amended tax return, for the year 2002, and claim the deduction in that way. If you do take the deduction, you will need to file Form 1040, and you can take the deduction even if you're not itemizing other deductions.

The IRS, presumably because they believe hybrid cars will become more affordable in the near future, has implemented a plan to phase out this particular deduction by 2007, so if you're planning on buying a hybrid vehicle, and want to get a tax break, you'll need to do it in the next couple of years. Also, keep in mind that the clean-fuel deduction is a distinct entity from the electric car credit, which provides the owner of an electric vehicle with a dollar-for-dollar credit on their tax return.

For more information about the clean-fuel deduction, see IRS publication 535 or consult a tax professional.